Omega Healthcare Investors Inc (OHI) 2003 Q1 法說會逐字稿

Good morning. My name is Wendy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Omega Healthcare first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Taylor Pickett, you may begin your conference.

Thank you. Good morning. Thank you for joining our first quarter conference call. Comments made during this call that are not historical facts may be forward-looking statements such as statements regarding our business outlook, dividend policy, paying extension or refinancing of debts and financial projections. These forward-looking statements involve risks and uncertainties that may cause actual results to differ materially. Please see our pres releases and our filings with Securities and Exchange Commission, including without limitation our Form 10-K and Form 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements. During the call today, we will refer to some non-GAAP financial measures such as FFO and adjusted FFO. Reconciliation of these non-GAAP measures is the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures are included in our press release issued this morning, and are available in the new release section of our website at omegahealthcare.com. With me today are, Dan Booth, our Chief Operating Officer and Bob Stephenson, our Chief Financial Officer who will provide operating and financial reports. Other members of the management team will participate in the question and answer session. I will review Omega's FFO results, our debt maturity issues, certain portfolio issues, the sale of Baltimore Post Office and our dividend policy.

FFO; Reported FFO is $13.5m or $0.25 per fully diluted share and is in line with our operating plan. Included in our reported FFO is $2.2m in proceeds received from a legal settlement and $1.3m in net expenses from our owned and operated portfolio. Also, we recorded a non-FFO $4.6m balance sheet provision for impairment, a non-cash charge for closed facility that we recovered from Sun Healthcare. On the debt refinancing front, we have total debt today of $289m, consisting of bank debt of $177m, bonds of $100m and other debt of $12m. Cash on hand today is $35m. We continue to actively work with a group of lenders, including members of our current bank group to refinance both of our current credit facilities. Our goal is to have a credit facility that will provide our Board of Directors the flexibility to make the decision to reinstate and possibly catch up the preferred dividend. From a timing perspective our goal is to have an announceable transaction prior to the second quarter conference call. Beyond this disclosure, the company believes that it would be very premature and possibly detrimental to our financing efforts to discuss any additional details related to our current negotiations.

On the portfolio front, today we are down to one facility that we own and operate. This facility generates a modest amount of positive cash flow, and we are actively exploring releasing alternatives. As it relates specifically to Sun Healthcare, we have continued our discussions with Sun, which call for continued cash payments of at least $1.3m per month plus the transition of certain facilities to Omega designated operators. We do not have a signed agreement with Sun and therefore, Sun is currently in default of our leases and Omega is negotiating the Sun to reach a temporary deal that may ultimately convert to a permanent restructuring. There can be no assurance that Sun will continue to pay rent at any level. Although, the company is confident that given agreement is not concluded with Sun, there are alternative operators available to lease survive these facilities.

Turning to the Baltimore Post Office yesterday, we closed the sale of the Baltimore Post Office netting approximately $1.9m in cash and the buyer's assumption of 17.6m in related mortgage debt. With this sale, we have now liquidated substantially all of our non-healthcare related assets. Finally, our dividend policy at June 30, 2003 the accumulated preferred dividend will be approximately $50m there are two issues that we are looking to clarify before we reinstate our dividends. First, the refinancing of our debt, which I previously discussed and second, our continued assessment, effect of the recent Medicare reimbursement reductions, and potential Medicaid rate changes on our operator's ability to maintain the current rent levels. And particularly, our ultimate resolution was Sun Healthcare. Robert Stephenson, our Chief Financial Officer will now review our first quarter financial results.

Thank you Taylor. Our operating results for the first quarter; our balance sheet continued to reflect quarter-to-quarter improvement. As Taylor mentioned, our reportable FFO on a fully diluted basis $13.5m or $0.25 per share for the quarter as compared to $7m or $0.15 per fully diluted share in the first quarter of 2002. When removing the legal settlement income and the net expense associated with our owned and operated assets, adjusted FFO is $12.7m or $0.23 per share on a fully diluted basis for the quarter as compared to $8.9m, excuse me, or $0.20 per fully diluted share in the first quarter of 2002.

Revenue for the quarter excluding our owned and operated assets and the legal settlement was $22.4m versus $22.2m in the first quarter of 2002. The $200,000 increase results from a $1.2m increase in a rental income offset by a $1m decrease in mortgage interest income. There are number of components that make up the $200,000 increase, but basically the I gess (ph) restructured transactions shifted mortgage interest income to rental income. Dan Booth will talk in more detail about this transaction when we go through our portfolio.

Turning to expenses, for the quarter expenses excluding owned and operated assets, the provision for impairment, and adjustments for derivative accounting were 22% lower or $12.6m versus $16.2m for the same period one-year ago. The $3.6m favorable reduction versus the first quarter of 2002 was primarily a result of $0.5m of favorable G&A and legal cost resulting from the reduction in consulting and legal expenses associated with our owned and operated assets. One year ago, we had 19 owned and operated facilities versus the one that we have today. And two, there was a $3m decrease or savings in interest. The interest expense of $5.1m for the quarter was $3m less than the first quarter of 2002 due to approximately $85m of reduced debt on our balance sheet.

As Taylor mentioned in the first quarter, we recognized a non-cash $4.6m provision for impairment associated with one closed facility we received back from Sun. This facility was written down for its estimated fair value less disposal cost. Turning to the balance sheet, year-to-date total assets decreased $3.7m versus December 31, 2002 primarily due to normal depreciation and amortization as well as the non-cash provision for impairment associated with the one Sun asset. It is important to note that during the first quarter of 2003, our balance sheet did undergo some formatting changes. Within our real estate property, our land and buildings increased approximately $44m while our mortgage notes receivable decreased approximately $49m. This change primarily resulted from the IHS restructure transactions, which converted mortgages to new leases with new operators. At March 31, 2003, we had $25.7m of cash in our balance sheet versus $15.2m at year-end. Today, we currently have approximately $35m of invested cash.

On the liability side of the balance sheet, we have $306m of debt at March 31, 2003 of which $112m matures in December of this year. As Taylor mentioned, yesterday, we sold our investment in the Baltimore Post Office for approximately $19.6m, the company that bought the Post Office from us paid us a proceeds of $1.95m and assumed a first mortgage of approximately 17.6m. As a result of this transaction, our debt is approximately $289m today versus 306m at March 31, 2003. At March 31, 2003, we had $35.5m of availability under our two revolving lines of credit. In addition, our debt to normalized EBITDA also improved from 3.80 times at December 31, 2002 to 3.76 times at March 31, 2003. We face some issues, which could potentially result in additional non-cash asset impairments, non-cash provisions for uncollectible mortgages, notes and accounts receivable, as well as potential gains and/or losses on asset sale. The events that could trigger these charges include: One, the outcome of the our restructure negotiations with Sun and Alterra. Two, the timing and net sales proceeds from 15 closed facilities with a total net book value of $16.2m. These facilities are actively being marketed and there could be no assurance if or when such sales will be complete. And three, our ability to collect owned and operated accounts receivable, which had a net balance of $4.8m at March 31, 2003. I'll now turn the call over to Dan Booth, our Chief Operating Officer.

Thanks Bob, and good morning. As of March 31, 2003, Omega had a core asset portfolio of 209 facilities, nearly all of which are skilled nursing homes. The portfolio is distributed amongst 35 third party operators located within 28 states. Diversity amongst the Omega's core operator portfolio continues to expand in 2003. As large exposures to Integrated and Lyric had been restructured in our re-lease to numerous new operators. Today, our largest 12 operators represent nearly 80% of our core investments and revenue. One year ago, eight operators represented 18% of our core investment and revenue. Occupancy among the 12 largest tenants as well as the portfolio as a whole, once again remained unchanged at 83% and 82% respectively, both for the year-ended 12/31/02 as well as the fourth quarter. Coverage ratios show surprise resilience in the fourth quarter of 2002, actually improving over third quarter results. Trailing 12 months EBITDAN coverage for the period ended 12/31/02 was 1.58 times versus 1.56 times for the period ended 9/30/02. Likewise, EBITDAR on coverage improved from 1.13 times as of 9/30/02 to 1.15 times as of 12/31/02. The difference in EBITDAN and EBITDAR coverage is an implicit 5% management fee.

Cuts to the Medicaid rate as of October 1, 2002 during the 'cliff' impact were offset within the overall portfolio as operators managed to cut expenses, show pair mix improvement and perform revenue enhancing shifts to various Rogue categories. With regard to our owned and operated portfolio, today, the company had one remaining owned and operated facility in 128-bed home in the Illinois. Omega is in discussion with various potential tenants to re-lease this facility. Our target to re-lease this facility is sometime in the third quarter of '03. With regard to portfolio developments. First, Sun Healthcare. In addition to comments made earlier by Taylor, during the first quarter of 2003, Sun remitted rent of $5m versus the contractual amount of 6.4m. The company has agreed with Sun to use letters of credit in the amount of $1.4m to make up the difference in rent for the quarter. The company held additional security deposits in the amount of $1.4m as of March 31st ,2003. In April and May Sun paid approximately 1.3m and 1.3m respectively, versus the contractual rent of 2.2m. The company applied security deposits in the amount of 1.4m. At the date of this release, Sun has exhausted security deposits with the company.

With regard to Alterra Healthcare, the company currently leases eight assisted living facilities located in seven states to subsidiaries of Alterra. In the first quarter of 2003 the company was notified by Alterra that it is not intend to pay January rent and that a restructuring of its Master Lease was necessary. Subsequently, Alterra resumed and has continued to pay lease payments to the company at an annualized rent of 1.45m versus the fourth quarter 2002 annualized contractual rent of approximately 2.6m. The company is recognizing revenue from Alterra on a cash basis.

Alterra also announced during the first quarter of 2003, that, in order to facilitate and complete its ongoing restructuring initiatives, they had filed chapter 11 of the US bankruptcy court for the district of Delaware. The company is in a process of attempting to negotiate the restructure of the Master Lease. At this time it's too early to predict the outcome of the negotiations including the ultimate impact of bankruptcy proceedings or any subsequent developments.

With regard to the Integrated Health services, at the time of the last conference call Omega was days away from concluding its restructure and re-leasing of its IHS portfolio. During the three months period ended March 31, 2003 the company successfully re-leased nine facilities formerly operated by IHS. Accordingly eight skilled nursing facilities, which the company held mortgages on and one skilled nursing facility, which the company leased to IHS and then re-leased to various unaffiliated third parties. Titles to the eight properties, which the company held mortgages on have been transferred for the wholly owned subsidiaries of the company by Deeds in Lieu of Foreclosure.

Specifically, during the quarter ended March 31, 2003 the company leased (ph) nine SNFs to four unaffiliated third party operators as part of four separate transactions. Each of the nine facilities had formerly been operated by subsidiaries of IHS. The four transactions included a Master Lease of five SNFs in Florida representing the 600 beds to affiliate from Seacrest healthcare management with an initial annual rent of $2.5m, a month-to-month lease of two skilled nursing facilities in Georgia representing 304 beds to subsidiaries of Triad health management, which lease has annualized rent of $700,000. A lease with one skilled nursing facility in Texas representing 130 beds, to an affiliate of senior management services with an annual rent of $384,000 by year three. And lastly a re-leased of 159 beds skilled nursing facility, located in Washington state to a subsidiary of Sun with an initial annual rent of $500,000. These leased transactions terminated substantially all contractual and debt relationships with IHS.

Thank you Dan. As a quick summary our core earnings are on target. Based on our projected Sun cash flows, we believe that the Sun portfolio continues to have significant long-term value. We have made progress negotiating with Sun. However, it's still too early to predict, if we will be able to reach an agreement with Sun regarding all or any portion of this portfolio. And finally, our overall credit statistics continue to improve with debt net of cash on hand today to EBITDA of 3.21 times. This concludes our prepared comments. We will now take questions.

At this time I'd like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Mike LeConey of Sky Capital.

Yes, hi.

Good morning.

Good morning. Could you give us a feel for what -- how many -- how many of the Sun facilities that you're currently looking for alternative operators for?

There is a - there are handful of facilities that Sun clearly does not want to retain, but the negotiations are fairly fluid, so to pin point in exact numbers, it is just premature.

I mean -- I guess, relating to that here they are paying you rent of about 60%, I guess, of the current payable amount, I mean, is that -- I want to say, I mean, that's some indication of how many facilities they want to keep or might release?

You know, I understand your question.

Okay, I am sorry.

No, let me -- to the extent I can answer it. The $1.3m that they are paying today, which is subject to continuing negotiations. As I would call the base line that they are comfortable paying for the properties that they would expect to retain if we are able to reach a [Inaudible] agreement.

Okay.

Therefore, we look at that as a base rent as I said there are a handful properties that we agree with Sun should exit the portfolio, we have looked at and have identified alternative operators in the leasing of those facilities would be upside from that base. But I have to caution you that we don't have to sign deal with Sun. So the amount they are paying us is -- I wouldn't call it voluntary per se, because obviously they are in default and we have our rights as well, but it is to some extent agreed as part of our ongoing discussions.

Yeah, that's what I was wondering about. I mean, just a last to mention is, you continued to have another operators or other owners had remarkable success in finding new operators. Could you give us some -- give me some color or sense, I mean -- obviously, the existing owners or using operators can pay or don't want to pay the rent, but it seems to be quite a supply of alternatives? What is going on or maybe that's [Inaudible] ?

Sure I'll ask Dan Booth to respond to that.

Yeah, I think, that we have had seen a quite bit of success in releasing properties in various states. There is still is a very wide market out there or skilled nursing facilities. We have found that the Plague Verox (ph) has been to deal with your more, I guess smaller regional operators that are really focused on one or two states and that seems to be where, where we had the most success. And I think, with the Sun portfolio as well our initial need of the market is that these facilities could be released quite readily.

Thank you very much.

Thank you.

Your next question comes from Howard Feingold of Raymond James.

Thank you just two questions. On the FFO $0.25 per share, am I correct is that after the accrual for the preferred dividends?

The fully diluted calculation would include the assumption that the preferred C was converted to common and therefore, the preferred C dividend is an add back, but it does reflect the dividends that on a performed basis that would pay to AMB.

Okay, thank you. Secondly, can you comment in any way about the linkage on the re-financing of the Bank Lines and coming to a final agreement with the Sun?

I can comment a little bit in the sense that, we are pursuing the refinancing, the banks are fully aware of our current negotiations with Sun and a resolution per say is not a condition to completion of the refinancing.

Okay, thank you very much.

Your next question comes from Rick Rubin of Legg Mason.

Good morning, it seems like things are certainly working themselves through, some congratulations from that. With Alterra, give a little bit color on when they started resuming the rent payments in your thoughts on the level they are paying, is this again a baseline amount, the 1.45m. Could it be some facilities that are coming back to you and being released in the new operators?

Yeah, with regard to Alterra they did not make a payment in January. They resumed the payments shortly after they filed in February and it continued every month since then. And similar to Sun, that payment represents -- the payment are upon the facilities, which Alterra would like to keep and does not represent the entire portfolio. So, there is certainly upside to some releasing of certain facilities within that portfolio.

Okay and can you give us some color on the EBITDAR rent coverage, as it relates to just the fourth quarter after the Medicare rate cut. Oh and this is I guess portfolio wide not necessarily on Sun?

EBITDAR coverage for the fourth quarter standalone was 1.13 for the quarter alone versus what we talked about which was trailing 12 months at 1.15.

Okay.

By the way from 1.10 as of the third quarter.

Okay, I mean -- I guess, I was a bit surprised, can you give a little more detail on what that was. I think, you were starting to give some indication, the operators were reducing expenses, but with the Medicare rate cut going to affect - you would think that would go the other way?

We had certainly anticipated it going the other way and certainly in all our pro forma that we ran, we had the coverage’s going self. And some portfolios in fact did go south, but we've got a good diversified mix here and so overall the portfolio improved and once again it was the result of various different things. I mean, overall the portfolio's occupancy was stable, but we have we saw occupancy go up in a number of portfolios. And we saw a good bit of expense cut, we saw a lot of shifts in the RUGs categories, which is top line favorably, and we also saw fair mix shifts. And the combination of all those things and the combination of all our operators combined resulted in actual improvement in coverage’s for the fourth quarter.

Okay and final question, do you think this level of EBITDAR is sustainable or is it just a blip (ph) the fourth quarter coverage or you think that's sustainable by the operators? And the last piece is the -- how do you think the Medicaid, potential Medicaid cuts could play to this, what are your expectations for what that would you do the coverage going forward?

Well, we certainly think the coverage levels are sustainable. We actually think that there are some more rooms for improvement within some of our operators. These are incorporating a lot of re-leasing events where these facilities have just recently been re-leased. And so, they haven't had time to season and they haven't had a lot of time to add these new operators do a lot of improvements to the bottom line as of yet. So, we actually expected to stay where it is, if not improved.

Medicaid cuts, certainly, could have a detrimental effect on coverage’s, there is a lot of noise out in the market in various states, as to where those cuts will come out. We constantly - perform a hind in various cuts in various states. At the same time we - there are some states, which are talking about increases in Medicaid as well. So those will offset that. It's really a timing issue of when these cuts come through and to what extent. And it's very hard to predict from where we fit as to what impact that's going to have.

Yeah, I think, the only thing I add to the Medicaid discussion is, in the last couple of months we've seen states react to cuts in various ways; in West Virginia you see a cigarette tax, with a number of states you are seeing institution of bed taxes or increases in bed taxes to help pop up the revenue side. And I think, that's a recognition that for the most part any kind of significant Medicaid cuts are going to create access issues, because the margins are about as tight as they are going to get to have a survivable industry.

Okay. Thanks for the additional color.

Your next question comes from Preston Raisin (ph) of Brason Capital Management.

Just a general question to the health of both reimbursement and in that spirit or regard in the overall picture at this visit (ph) . You know, particularly the Sun, I am kind of new to that, store in terms of whether it was a miss management issue or just because the health of the reimbursement and sort of a big question is on the reimbursement front. And perhaps that our operators, do you feel, say this month -- looking out six months as oppose to six months past that the health of the whole system if you will is improving? Vis-à-vis lining up operators in case Sun doesn't get their act together. Thanks.

Yeah, I think that when you look at Medicare, the good thing about Medicare is a general sense that there is now stability in that system and I think, it's highly unlikely that we would see any further reduction and I think, there is a general expectation that on October 1, at a minimum, we will see the inflation increase that's part of the regulations and no changes in that system for a period of time. So that stability is helpful for a variety of reasons and as we discussed a little bit in response to Rick's question in a Medicaid is a bit of a question mark, although it is -- the states are looking for ways to avoid making cuts there, because there is just not much room for the industry to sustain any kind of significant cuts. So, I think, overall we are looking at a little bit of more stable marketplace from rate perspective as it relates specifically to Sun. Our belief is that the Medicare cut that affected Sun had nothing to do with management in fact, we are favorably [Inaudible] to the management team as it is in Sun today. They entered the picture as part of the bankruptcy, and they have only been in place for about one year.

Great, good job and thanks.

Thank you.

Your next question comes from Bill Schroeder (ph) of GPP Capital.

Yeah, hi guys. I was wondering, if you could just give us a little bit of color on what your thoughts are for the normalized FFO, if you include the new level of the rent that Sun is paying you now given that you have an exhausted security deposit letter of credit available. The rent that they are paying you seem to have been cut pretty dramatically, again and maybe you could just give me a little bit more color on that? I am sorry, if I missed some of your comments. If there is some facility specifically that they aren't paying you anything for because they plan on canceling those leases? And then I have a follow-up.

Sure, in terms of looking forward the company is not putting out forward FFO projections, but -

Yeah, I don't want projections, just what the run rate is?

Sure, and I think, the easy way to look at that as Bob discussed are recalling of adjusted FFO now under the new rules is $0.23 in the first quarter when you pull out the favorable legal settlement in the O&O losses. And that is a base line with Sun in -- at the full contractual rate every 500,000 or so dollars is a penny and therefore you can do some real quick and easy math, where you look at Sun at a contractual rate of 2.2 a month versus 1.3. But to go back to a statement I made earlier, the 1.3m is what Sun is paying us today and it's their view of what the portfolio is, it's part of our negotiations. It's subject to continued negotiations and it doesn't reflect the payment for the entire portfolio, and there is an expectation, if we continue our negotiations with Sun that a handful properties would come out of that portfolio and would be re-leased and would generate additional rental income.

So, just to understand this properly. The first quarter 'adjusted FFO' includes the full contractual rate of which you really won't even receiving, you're taking down letters of credits security deposits to make up the difference?

That's correct.

And now, we are talking about on a quarterly basis, almost $3m less in FFO, $2.7m less in FFO from Sun?

Well again, you up take all that in the context of Q2 we have security deposits and letters of credit. And, we are in the process of negotiating with Sun but --

Sun you have letters of credit and security deposits for -- I thought you said you had exhausted all those?

We have exhausted as of today. There was -- how much was [Inaudible] .

There was another 1.4m that will be booked into the second quarter results.

Okay, so --

So, it's the third quarter that but once again it's an ongoing negotiations, so I believe [Inaudible].

So, it's 2.7m reduction less 1.4m add back, so, essentially no -- you are losing about 1.4m in FFO from this quarter's run rate but that current day's run rate is 2.7m less than it was in this quarter you are reporting?

Subject to an enormous amount of online negotiation, that's right.

Right, I just want to make sure that that's clear because I think, sometimes it's confusing to read the press release and assume, I have got $0.25 of FFO going forward, when it really from today it looks like $0.20. You know, subject to, obviously, some re-leasing possibilities. So, if the write down you took on the property -- that was just the one property, is that right?

That's right.

That's a closed facility?

There was a facility in the State of Washington that was closed. And when it was returned from - out of the master lease from Sun into our portfolio that was the accounting trigger for evaluation.

Okay and was that the full carrying value?

No.

What was the full amount?

five nine would be invested amount.

Okay, 59 so that was one of their larger facilities?

I would say, it was a typical facility.

Okay, I am just looking at the average value per facility at the end of a year was like 4m or 4.25m.

In terms of size the facility isn't typical.

Okay, for Sun with this rate down I mean, obviously, this must have been I am assuming a pretty low occupancy facility I would look back the whole portfolio was some where around 87% at the end of the year? I am trying to figure out why, because the 87% is much higher than your average portfolio occupancy. Why Sun thinks but, will why the contractual rent they want to pay you is so much less and does that imply and I think, we may be touch on this last quarter does that imply potential asset rate downs going forward, because the net operating income of these facilities by yield been in essence, but these are throwing off is much less than they were when you originally invested that money?

We are getting into – unfortunately so - a little bit of this is the technical accounting rules were in impairment is measured based on future undiscounted cash flow strains first residual value and because of the way those accounting rules work in general our impairments come from facilities that are closed where there is no on going cash flow stream the reduction in the future cash flow stream has to be very dramatic to get into that impairment analysis. It's just the way the accounting rule map goes. So, you could see from a business perspective yield drop and returns drop and not have ”accounting impairment”.

So, if that monthly rent goes from 2.2 to 1.3 that's not dramatic.

Well, I am not saying from an accounting prospective that might not create an impairment.

Okay, what about from the collateral agreements for the current debt that's outstanding I know that on the 100m piece, I believe, you have about two to one assets to debt collateral requirement.

Right.

What's the test there for asset value. Is it the same GAAP test, or who determines what the collateral value is?

Specifically we would have to go back and then look at it, there has always been an enormous amount of cushion in that test given our investments and what we have secured under our two credit facilities.

Worth while so, but is an accounting - ?

But we take the accounting records in terms of the asset value and if the question is, is there the possibility that an accounting impairment could affect our covenants. The answer is, that it is extremely unlikely. Very, very [Inaudible]

Okay, so it is based on your GAAP impairment test basically?

It is based on our GAAP balance sheets.

Okay, and lastly I appreciate the time, the occupancy at the end of the quarter for the portfolio?

For the entire portfolio 82%.

Okay. So, about same as the end of year?

Yeah.

All right, thank you.

You are welcome.

Your next question comes from Evan Steen (ph) of EOS Partners.

Couple of questions. Lets just start on the Sun. You listed the 5m in rev (ph) , but you said you use the 1.4m for the letter of credit. Where does that show up on the income statement?

The use of the letter of credit?

Yeah. In other words, is that just a cash item that appears and it doesn't show up in revenue? I am just trying to understand the accounting of it.

That goes, it goes through revenue.

Okay. So, where on, if you said the contractual amount was 6.4m (ph) , they only paid you 5. So, then, out of the 16.6m (ph) there are 6.4m in there?

That's right.

Okay. The next question is, you mentioned the big shift with IHS between the mortgaged notes and the rental income. Could you give a pro forma of what the mortgage interest income might look like for Q1, or just give me some sort of guidance for Q2 given the fact that the number dropped from 174m to 125m?

The easiest thing, I know exactly where it has headed up in terms of trying to pro forma out, and I think the easiest thing since I don't think anyone in this room has that piece of paper in front of them, would be to circle back with Bob Stephenson.

Means it's fair enough to take the dollar difference and assume at 10% interest rate, as a starting point. In other words, I am just assuming mortgage notes receivable, I forget exactly --

Yeah and I think if that's [Inaudible] back to the call as follow-up with me.

Okay, fair enough. Then likewise, could you give me what the IHS rental income was for the quarter and sort of on a full bloom basis, what that would look like on a quarterly basis going forward? It's confusing to try to figure out if you were up to `normalized` levels in this quarter or not?

Yeah, I think Bob should walk you through the, all that detail. Let me just me make a broader comment on a quarter-to-quarter. If you look at the entire portfolio, excluding Sun, in general, our expectation is quarter-to-quarter, revenue streams from rest of the portfolio should be consistent. So you have a modest decline when you go through all the different pieces of IHS, if a couple of modest increases for various step-ups and other things and really the swing from quarter-to-quarter and into the future and FFO is the ultimate outcome of Sun. So Bob will work you through all the moving pieces, but very broadly, that's how we view the portfolio the business kind of tracking forward.

Okay, fair enough. You didn’t mention Advicant (ph) , which should have just come out with the results of their legal settlement. I know last time you said you had very strong [Inaudible] . I assume no issues; you guys are comfortable with the payments and so on?

Yeah, we are still very comfortable with the Advicant portfolio. The facilities themselves continue to do very, very well.

Okay. Could you also comment, you saw the portfolio of the post office. Could you remind me what the interest rate was on that loan again?

7.26%.

Okay, so that goes the way -- that's in the other investment income line?

That's correct.

And after the interest expense drop in the quarter. Okay, the other question. You mentioned the coverage’s for the portfolio in the quarter. Could you just give me some flavor and if we fast forward six to nine months out and you worked your way through Sun and you worked your way through with Alterra and possibly released some of these ones that they are not interested in, all things being equal, assuming Medicaid cuts are neutral, it's too complex it sounds like to try to detail it. How much of an improvement in coverage ratios do you think you might -- we might see off of that numbers that you listed currently?

I don't have a crystal ball. I think that what we said before was accurate that -- given what we know within our portfolio there, there is upside to these coverage ratios. Certainly, by virtue of certain restructuring whereby the rent might go down, that alone will increase coverage’s. But, as far as enhanced performance, we do expect a lot of our re-leased facilities to improve in terms of coverage. Most of those re-lease activities were not done in significant coverage’s, because that would just push down on the rent that we will receive. So, the coverage’s are generally tight as they go up the door and in fact, in some instances, they are below one-to-one. So, [Inaudible] .

[Inaudible] it would be higher.

We believe that it has potential to improve.

Okay, and then lastly, you have one facility left. Could you just speak about the tale of account receivable, I mean the cash picked up a large amount, you know, in the past two months. I am not quite sure how I get there. I can see the money being generated from the portfolio part if you get 2m, actually 35m if it is high. But I just trying to see, like you said you cleared out most of the healthcare properties. The only other sort of other area I could see where you can sort of a beneficial kick other than the remaining Omega Worldwide piece would be perhaps the accounts receivable that were part of the facilities that have sold and recovery of that going forward. Could you just give me some feel if that's a material number or sort of where that stands?

Yeah, on a - on a net basis, there is 4.8m net AR left on those facilities.

Yeah, I would -- when you look at cash, non-healthcare related potentially cash opportunities, we have an investment in Omega Worldwide Australia, which is on the books of $1.3m. We have a continuing note receivable related to our settlement with Madison, and that note receivable is 2.3m, correct me if I am wrong Bob.

2.2m

2.2m. We have got $4.8m in net AR, and we've got 6.2m in assets that were -- that are close facilities that we are accounting to sell. So, those are the primary potential cash opportunities over the balance of the year and then, in addition to that, we have one lawsuit, where we are the plaintiffs that the result is really unknown, but could yield some substantial dollars.

Okay, fair enough. Just tell me, I just wanted to understand this last question on free cash flow. If I assume and this is -- this is my guess, at some point say with 18m of EBITDA per quarter on a yearly basis, that would be about 72m, and your interest expense is going to drop below, well below 5m, because you are paying off the mortgage sale. I don't know, I am taking a guess, it's $4.8m times four, that's about $53m. From that you have $20m, it will take or maybe $21m on the preferred if you were paying it in cash and if I walk that through, that gets me, give or take about $30m of free cash flow per year if you were paying the preferred interest and maybe some miscellaneous Capex and taxes, you know what ever else. Is that the proper way to looking it?

I think that, in terms of how you just walked down the numbers, that's how I walked down the numbers. Now, in terms of the exact amounts, you know, we obviously are precautious, because we have Sun out there to continue to finish off and you know, with the re-financing works that we are doing, you know, some of those numbers could change a little -.

Yeah, now I understand the interest expense could be higher and that's you are eventually paid up the dividend you might have to borrow a little bit?

Yeah, so, but in terms of just winding the numbers up, that's how I do.

Okay, and then from that eventually would come a decision whether or not to take some of that money instead of paying out as a dividend to the [Inaudible] ?

Absolutely.

Okay and perfect. Okay a very good job, I really commend you guys, because it has been a incredibly difficult environment and you've really executed very well. I don't think you guys thought that this is going to happen with Sun, you know a year ago, but you've really done a very good job and you should be commended. It's a very tough environment.

Thank you.

Okay, thank you.

Thanks.

Your next question comes from Harry Zalmeck (ph) of River Run Financial.

Hi, gentlemen thanks. I have a question regarding the payment of dividends. You made a comment that - part you might re-instate the payment of the preferred and you might re-instate the exact, I maybe, I read something into it, but that was not full amount of the preferred, but that was on an ongoing basis you were going to pay a dividend and not necessarily bring your arrears up to being current. If and when you start paying dividend and my question goes to the fact if, what will be the requirement to maintain REIT status for Omega given what its picture is today and perhaps projecting in the future on a normalized basis?

Okay, we could just to be clear on the dividend side. Obviously, in order to pay common we have to fully catch up the preferred arrearage and [Inaudible] . In the comment related to preferred that I made, really tied to where we are with the financing and where we are.

Our goal is to be at a position to provide our Board with the opportunity to make a decision. And you know, I can't speak for what that decision would be today and obviously will continue to look at, sort of moving parts in the industry in our portfolio as it relates to timing. That they've said as it relates to our requirements to pay out a dividend to maintain REIT status. The company's position today is that we will retain our REIT status. For 2002 we do not have taxable income and therefore we don't have any requirement to pay a dividend. For 2003, it's possible that we will have taxable income, and we will make distributions necessary to maintain our REIT status and I'm not trying to be sketchy here, but our taxable income is a little bit hard to nail down because we have certain book loses where we've had impairments in the past with the ultimate disposal of that assets, which could happen this year will actually trigger a tax loss. So, it's not quite as simple as saying, here's what your booked income is and typically booked income and taxable income in this business are pretty close. We do have both [Inaudible] carry forward of $24m and we have the potential to trigger previously impaired losses which could be taxable losses, so I'm not trying to say it's around that. We may or may not have taxable income this year.

All right, so assuming you don't have taxable income and you have this tax [Inaudible] this end will carry, I assume, reduces your taxable income for redistribution purposes?

It does.

It does. There it would be a long time before Omega were forced, it looks like to maintain -- to pay dividend in order to maintain its REIT status?

That's accurate. I don't think taxable income is going to be the driving -- the driver in our decision to reinstate dividends at a meaningful level in the near term. I think, the decision, the driver of that decision is going to be the Board's -- the decision the Board is going to make relative to what the company is going to look like and what we are going to do.

Sure. Very good, thank you very much.

You're welcome.

Your next question comes from Matt Zot of First Alliance Capital (ph)

Good morning congratulations, the turn around seems to be going quite well. I'd just like to reiterate what you said on Sun, so I understand that you said that the rent that they have chosen voluntarily to pay is more reflective of the portfolio that they would like to maintain and you suggested that the re-leasing environment has been -- there has been number of operators that have taken on these properties, and there was only about a handful or so that were, that Sun did not maybe want to maintain. Can you give me some reflection on the properties that you have re-leased as you've executed this turn around over the past year or so? What the percentage drop in rental income has come as -- on average as a result of other's facilities being re-leased?

Yeah. I want to be -- Sun, just to be clear. Sun initially volunteered up of somewhat lower number, and we've been in some fair --fairly detailed negotiations that are ongoing. So from that perspective -- and they continue to be ongoing we think that the portfolio has value, perhaps more value. So, I just want to be clear there that that where we are with Sun is trying to come to a deal that makes sense from our perspective, and one thing I had mentioned in the first quarter call and I hadn't mentioned today about [Inaudible] repeat here is that that the whole portfolio -- the whole Sun portfolio has projected cash flow before rent, but after a full management fee and CAPEX of somewhere between $20m and $24m. So, when you look at those projected cash flows you can make some assessment of the potential rent that can be generated, you know, part of the question is getting from here to there. As it relates to your question of re-lease rent versus contractual rent all over the board.

Well, it's very tough to pin that down, because a lot of our re-leasing activities as we know have been re-leasing of owned and operated properties, which the company has taken back years ago, some in 1999, some in 2000. We are quite frankly, I'm not sure what's the contractual rent back then was. Those facilities were then managed for a period of time by a third party, and then re-leased in the last 18 months. So, we haven't looked at it from that perspective very carefully. You know, market conditions changed, but as Taylor said, it's all over the board relative to what the investment was and what the returns on and that's kind of what we look at.

Well, you mentioned before that, or maybe somebody else mentioned that the occupancy of the Sun properties was something on the order of 87% versus our portfolio of 83%. Given the nature of the facilities that have been released, but say more recently reflecting the new market dynamics since the cliff in October, is there some range that we can look for, suggesting that since some facilities maybe are higher occupancy that maybe, a haircut (ph) would be similar to what's taken place in the facilities that have been released in the portfolio in the last six months, less, more, is there any kind of guidance that you could lead one to pencil the number because I -- you suggested, then I think it's rightly so that the Sun voluntary payments, so to speak, is obviously like the low end of expectations of any kind of negotiation, obviously where with our master lease, we are going to go in and suggest that we want much more, and it's somewhere in the middle as I guess where we fall. As of [Inaudible] , you know, representing investors who own Omega, how does one estimate what that might be without you, you know, saying something that's detrimental to those negotiations?

I'm not sure that there's any. I think from where we sit today, the only other piece of disclosure is that we are looking at properties that we would take back, that wouldn't affect that rental stream and we went into the market looking at the rents that we would get on those properties and that would be incremental.

Okay, let me, so that's pretty exciting. So, what you are saying is there are some properties that you might be taking back that you will release that what might be actually better than the contractual rate that Sun has contained?

No, I don't think so. And -

What do you mean by that then, incremental?

Incremental to the 1.3.

Oh?

But let me, you know, I think the best indication of value is going to be, is to look at the projected cash flow of the portfolio before rent. And so in the first quarter, we laid that out. It really hasn't changed. Our current projections and they're consistent with -- some Sun's projections are that total portfolio after management fee and after capital expenditures will generate somewhere between 20m and 24m in cash flow. Obviously, that amount of cash flow doesn't sustain our current contractual rent, which is north of 25m.

Okay, so that's, well then, that does give me some type of gauge in that I'm looking at 20 to 24 versus 25 as the potential adjustment.

And if you go the marketplace, for the most part, you know, most operators aren't going to step in without some sweat to that cash flow.

Right, so somewhere in between there is where you take it back and then they release?

Yeah, right, they are going to release it some, there is going to be some spread in a release scenario.

Okay, so that. But I don't think that's not nearly as bad as somebody projecting using that 1.2 number wherever and trying to project it for the balance of the year. Obviously, it's going to be substantially better than that.

I think, part of the issue is timing for us. You know, today we don't have a written deal with Sun either on in an interim or long-term basis. And you were working hard with Sun to come up with an answer and we are also in the market place working at alternatives and for certain properties. So, you know, our concern is that - part of our concern is that although we think there is long-term value and we believe that we are trying to give the best indication we can of that value based on cash flows and what we are currently receiving. There could be noise in the interim, we are hoping that there isn't, but there could be.

Okay and then I guess seeing the subject a little bit, you mentioned the answer of the conference call that we hope to finalize some financing such that we could allow the board to make a decision and we are hoping to give them the information such that previous to the next conference call you might be able to bring the preferred current. Is that what was stated?

Now, what our goal in terms of our refinancing efforts today from a timing perspective would be to have something announceable prior to our second quarter conference call, so within 3 months.

So do we have presently - you know, obviously nobody wants us to drag into the fourth quarter. Do we have any commitments or any kind of like, you know, guidance in term of financing. So that at least one could walk away suggesting that, look you know, we feel like financing, we are going to receive financing, but we don't know what the interest rate is going to be or something along those lines, because there might be some bears in the market place that might suggest that you may have difficulty in giving financing at all.

We are actively negotiating with a group of banks, partly from our current bank group and some new lenders. We do not have any written commitment, but we are in the midst of active negotiations to try to conclude a deal and you know, I think the important thing there is, that, we believe there is some positive momentum we hope to conclude something in the near term. But we also have to be very careful. We don't have anything in writing; we don't have anything that we would be in a position to release on a public basis.

So it would mean that you have something verbally or not in writing, what does that mean?

We don't have any written sign commitments from -

So it's still not done until it's done, that's what you're saying. But I mean, is there any kind of flavor that one could give or color that would suggest that, you know, given our secured assets that are available on this credit line that we are re-negotiating, then its just a matter of, lets say terms as oppose to actually receiving them?

I think in any type of our refinancing scenario you are looking at a number of issues and a number of complex discussions and negotiations. And to handy cap how those go in the coming months is impossible. I think, at this point it's just too early to predict how those discussions conclude.

Okay, last question and I appreciate your time is that. You talked about a free cash flow number that might be available once we met certain milestones down the line. Would the - are there enough other significant opportunities in the market place were you feel like that money could be used towards showing some growth in assets that we might purchase, in order to grow our funds from operations in the future or do you believe that it would be most prudent to use that money to pay down debt?

There are certainly market place opportunities, -- a fair number of marketplace opportunities. The decision, yeah, there is obviously, all these decisions are late. We are reinstating the dividend use of cash for debt pay down or use of cash for growth and really that those threshold decisions are going to happen at the board level after we solve our debt maturity issue. All that being said to answer your question on our opportunities, yes, for all. And is there -- would there be an ability to establish a growth rate and support I'd like you to do so, absolutely.

Okay, thank you very much. Congratulations again. Looks like things are going quite well.

Thanks.

You have a follow up question from Bill Schroeder of GPP Capital.

Yeah, guys one quick question on the receivables, the net receivable number you gave, I thought you said 4.7m, is that current day, because on the balance sheet it's not showing as 4.7?

It's net.

[Inaudible] No, you've netted it in the balance sheet.

Let's go to the balance sheet, actually in the press release there is a detailed page that shows our owned and operated assets and liabilities and you will notice there is, from a net receivable standpoint, there is approximately 4.8, but there is also current liabilities associated. So, you will see on our balance sheet a net number of 22K .

Okay. I understand. In the consolidated $3.8m number? Can you give us a sense for how much of that is very aged in terms of something over 90 days because that is as you relate to maybe -- can be a source of how you could relate to DSO public [Inaudible] rental mortgage interest income compared to your accounts receivables? It's all relatively significantly, so who -- what is the culprit there? There is one significant account that the receivables are open (ph)

Let me look at the detail, hold on please. A largest piece of that -- can you just really the timing of Sun we drew -- we booked a revenue in the first quarter and we drew all letters of credit. So at the timing of one we received from the bank, the actual funds from the draw of [Inaudible] and the rest is just small dollars that make up some of the balances and if that's truly there is nothing that's truly aged a long time in there.

Okay, it's just a Sun timing.

That's a big piece of it, yes.

All right, thanks a lot.

You have a follow-up question from Preston Raisin of Brason Capital Management ph). Mr. Raisin your line is open.

Mr. Raisin has to take another call; can you poll him back in a minute?

At this time there are no further questions.

Well, perhaps Mr. Raisin can just follow-up directly with Bob Stevenson. Thank you for joining our first quarter call. Bob will be available for any additional questions that you may have.

This concludes today's Omega Healthcare first quarter earnings release. Thank you. You may now disconnect.